Climate FinTech: It is Time to Tackle Humanity’s Greatest Challenge
“To all of you who choose to look the other way every day because you seem more frightened of the changes that can prevent catastrophic climate change than the catastrophic climate change itself. Your silence is worst of all.” — Greta Thunberg
Human behavior and structures must change as the world strives towards net-zero and decarbonization. The Paris Agreement, adopted in 2015, calls for keeping global warming to well below 2 °C, preferably 1.5 °C. The key structure to support climate transition is the financial system, the largest industry in the world, with a market value of $22.5 trillion.
I will not dive into the science behind climate change, as much has been written about the need to reach net zero by 2050 to avoid irreversible catastrophic events such as loss of coral reefs and the Arctic. Nor do I have the credentials. Instead, I will focus on the financial sector and how it is driving the transition to a net-zero economy.
Quick background
Many developed countries pledged to reach net zero by 2050. The term net zero is thrown around and makes headlines, but what does it really mean? All greenhouse gas emissions produced are counteracted by an equal amount of emissions eliminated. Sounds simple enough, right? However, doing so requires rapid decarbonization through two ways:
- Reduction: Reducing the greenhouse gas emissions through the use of zero-carbon renewable energy sources such as wind and solar.
- Absorption: Absorbing carbon from the atmosphere by capturing emissions and enhancing carbon storage in agricultural lands and forests.
To achieve decarbonization, all aspects of our current economy must change — from how we generate energy to how we produce and deliver goods and services. The financial sector must be at the forefront of all efforts to transition to a net zero economy, with FinTech playing a vital role.
Lagging regulation leads to incumbents driving innovation
In a perfect world, regulation moves in tandem with innovation, but we all know that is not true. As startups, FinTechs move faster than our world’s slow-moving regulatory environment and love to break things. This is profoundly true in the U.S. due to its fragmented regulatory system, and climate risk regulation is no different. Despite adopting the Paris Agreement in 2015, the U.S. looks to other countries to lead the charge.
Climate change poses a threat to the well-being of not only the environment but also financial markets and institutions, and it is no surprise to see 70% of the global central banks and regulators view climate change as a ‘major threat’ to financial stability. Banking regulators are paying attention to the climate crisis. But similar to other aspects of oversight, regulation lags behind required actions. Therefore, incumbent banks and established FinTechs have taken actions to address the climate-related risks.
Doconomy has become a star in the Climate Tech startup ecosystem, providing banks, startups, and FinTechs with tools to offer their customers a digital-first platform for everyday climate education, information, and action. They have raised over $43 million to date from the likes of CommerzVentures, MasterCard, and Citi Ventures. Both MasterCard and Klarna have partnered with Doconomy in recent years. With Klarna, Doconomy partnered to create a carbon impact calculator, helping educate consumers around climate impact information. With MasterCard, Doconomy partnered to launch a free and easy-to-use mobile banking service that lets users track, understand and reduce their CO2 footprints through carbon offsetting.
Climate Tech market is a rapidly maturing asset class
In 2021, Climate Tech funding peaked at almost $45 billion across 1,100 deals. It followed a similar trajectory as FinTech deal funding, but at a fraction of total deal value and deal count, accounting for approximately a third of the FinTech deal value in 2021. Similar to FinTech, the US and EU accounted for the majority of the climate VC deal value, with over 77% of the deal value. I believe Climate Tech is on the cusp of transforming sustainability as FinTech did to finance.
Many VCs that invest in FinTech have already made their mark in the Climate and Climate FinTech space. Sweep, the leading carbon management platform for large enterprises, raised $73 million in Series B funding led by Coatue earlier this April. Coatue has invested in the likes of Monzo, N26, SoFi, and MoonPay. Kleiner Perkins has not only made investments in the Climate FinTech space, but the chair John Doerr and his wife Ann Doerr donated $1.1 billion to Stanford University to fund the creation of a new school focused on sustainability and climate change.
As we are still in the early innings of Climate FinTech so we haven’t seen many IPOs or M&A activity. However, there are a few companies on the IPO path.
- Watershed, an all-in-one software platform for running a climate program, raised $70mm Series B at a $1bn valuation co-led by Sequoia and Kleiner Perkins. This is hot on the heels of its Series A just a year ago.
- Xpansiv, a San Francisco-based provider of a premier market-infrastructure platform for global carbon and environmental commodities, raised $400mm venture funding from Blackstone.
- Persefoni, a SaaS platform that enables companies and financial institutions to easily meet stakeholder and regulatory climate disclosure requirements, raised $101mm Series B at $271mm post-money valuation.
Climate FinTech subsectors
With B2B startups raising almost six times more funding than B2C startups, I focused mostly within the B2B segment when developing a thesis and market map. Here is how I see the sub sectors within Climate FinTech.
Three initial areas of opportunity
Within the ten categories, I believe the three initial target areas are ESG Data, Analytics, and Reporting, Carbon Accounting, and Carbon Offsetting and Removal.
- ESG Data, Analytics, and Reporting: With more focus and capital towards decarbonization, it is imperative that carbon data and reporting is accurate. This data will be used by financial regulators to supervise banks and FinTechs, providing insights and trends to both the public and private stakeholders. With growing regulatory complexities in both the requirements and taxonomy, Climate FinTech startups can play a pivotal role.
- Carbon Accounting: This is the first step for consumers and businesses to understand their carbon footprint in order to improve sustainable behavior. Carbon accounting or tracking serves as the tools to track and calculate emissions to give a company an understanding of the impact of their daily actions and transactions.
- Carbon Offsetting and Removal: After we have the robust data, reporting and understanding of carbon emissions, the next step is to compensate for the generated emissions. Carbon offsetting is typically integrated at the end of a consumer’s checkout journey, offering them an opportunity to pay a fee to reinvest in carbon offsetting projects.
Institutional demand drives opportunity and innovation
There are three key areas driving opportunity in Climate FinTech. New sources and ways of treating data combined with emergent government policy and regulation are allowing FinTechs to harness technology that informs environmental standards and product design. Here we see many banks and insurers pushing towards the same goal line, whether it is achieving net zero by 2050 or elevating the role of ESG within the bank.
Climate FinTech is just the tip of the iceberg
Climate FinTech is just the tip of the iceberg, with FinTech touching all verticals within Climate Tech.
